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Marko Kolanovic Delivers 2019 Outlook And It Is Quite Something…

A truly incisive critique from the Street's most celebrated analyst.

Ok, sports fans, the Street’s most celebrated analyst is out with his 2019 outlook and for those of you who are reasonably constructive on equities headed into the new year, there’s a lot to like.

The bottom line is that JPMorgan’s Marko Kolanovic is headed into 2019 long equities and underweight bonds. He sees S&P EPS growth running at 8% in the new year and his S&P target is 3,100.

The economic rationale is straightforward. “We base our market outlook on the view that the business cycle will not end in 2019”, he says, before reminding you that “historically, equity markets peak several months before a recession, and to assume that market already reached cycle highs would likely mean that the recession needs to start around now.”

That, Kolanovic contends, is “practically impossible” considering where consumer spending and PMIs are and also accounting for still healthy corporate profit growth.

Beyond that, Kolanovic’s assessment is couched in terms of “reality” versus what he pretty clearly believes is a combination of excessive pessimism and outright fiction.

“Positive GDP and earnings are ‘reality,’ which is currently starkly disconnected from equity sentiment, valuation, and positioning”, he writes, on the way to flagging 12M forward P/E estimates which have fallen to near five-year lows and low exposure from both the discretionary/fundamental crowd and systematic strats.

Marko then poses the following question:

Why is there such a disconnect between strong fundamentals and valuations/positioning, and what is driving it?

If you’ve been following along, you probably know at least part of the answer.

At this juncture, I think it is entirely fair to say that Kolanovic is not amused with the rampant dissemination of misinformation, both market-related and otherwise. He’s been hinting at this for months and earlier this week, in a quick note, he reiterated his consternation.

Read more

Marko Kolanovic Critiques ‘Uptick In Negative Market News’, Weighs In On Trade, Fed, 2019 Outlook

In his 2019 outlook, Marko expands on the point – a lot.

After noting that it is natural for volatility to rise and for credit spreads to widen as monetary policy tightens and central bank accommodation is gradually rolled back, Kolanovic delivers his most pointed critique yet of how misinformation is disseminated to market participants. Here is his assessment:

For instance, there are specialized websites that mass produce a mix of real and fake news. Often these outlets will present somewhat credible but distorted coverage of sell-side financial research, mixed with geopolitical news, while tolerating hate speech in their website commentary section. If we add to this an increased number of algorithms that trade based on posts and headlines, the impact on price action and investor psychology can be significant.

What investors should understand – and we’ve been pounding the table on this for the better part of two years – is that misinformation, when disseminated by widely-read sources, has the potential to seriously undermine markets and because algos have no way to assess the credibility of a given headline or otherwise discern whether a given move in markets is at least partially attributable to traders acting on the same misinformation, the deleterious effect is amplified.

And oh, the irony. Because some of the same portals who spread misinformation have for years bemoaned the effect of algorithmic trading on liquidity. Now, some of those same portals are effectively making things worse.

Kolanovic goes on to note that the incessant barrage of tweets and caustic commentary from the Trump administration only adds to the confusion.

“The current US administration has also given more than enough material (e.g., tweets, etc.) to be exploited by these actors in order to create an environment of investment uncertainty (e.g., on issues of global trade, oil, business decisions of individual companies, etc.)”, he writes.

You might recall how, on Wednesday evening when S&P futures crashed, we suggested that in and of itself, the Huawei news couldn’t/shouldn’t have caused such a dramatic drop.

While other portals were busy screaming from the rooftops about Huawei, we suggested that between that screaming and a lack of market depth/liquidity, the story became a self-fulfilling prophecy.

Read more

What’s Behind The Flash Crash In S&P Futures?

‘China Will Take Hostages’: Huawei CFO Arrest Grabs Top Billing For Nervous Markets

Marko underscores that assessment – and then some.

“An example of the negative impact of carefully timed news stories is the recent episode with the arrest of Huawei’s CFO during the market holiday overnight session, which disrupted futures trading”, he writes, just after discussing how misinformation proliferates through the financial blogosphere. Here, for those who need a refresher, is how we described the same dynamic on Wednesday:

While we would caution that it’s too early to draw conclusions about whether and to what extent the news will seriously undermine U.S.-China relations barely five days on from the tentative trade truce struck in Argentina, we’d be remiss not to note that this kind of thing has a way of becoming self-fulfilling when markets are already on edge.

That is, two ostensibly unrelated events can end up becoming inextricably intertwined simply because enough people start to believe that they actually were related.

U.S. equity futures crashed out of the gate on Wednesday evening and it was by no means clear that the dramatic gap lower was entirely (or even partially) attributable to news that Canada has arrested Huawei Technologies CFO Wanzhou Meng.

The worry is that while the initial knee-jerk lower in U.S. equity futures might not have had much to do with the Huawei news, the fact that the story has now been widely cited as a possible contributing factor could cause traders to pull back or, worse, turn bearish.

That’s what Kolanovic means and we flagged it immediately with the Huawei story.

Moving on to liquidity, Marko delivers an updated assessment of the commentary we included in the above-linked S&P futures crash post.

“With higher interest rates, there are also real structural risks that are significantly higher this year the most prominent one is the decline of market liquidity, as provided by electronic market makers”, Marko says, echoing a theme that has pervaded his research for years. The following chart (left pane) shows S&P futures liquidity falling to an all-time low.

Marko2

(JPMorgan)

“Lower liquidity is largely a result of higher volatility and higher interest rates”, Kolanovic says, adding that “in an environment of poor liquidity, any market move will be amplified, thus creating a positive feedback loop between volatility, liquidity, and the news cycle.”

In addition to everything flagged above, Marko cites the following risk factors for the new year (and this is a truncated/abbreviated list):

  • residual risk coming from global trade frictions
  • equity markets can absorb one or two more hikes, but could come under increasing pressure beyond that
  • it is virtually certain that US political divisions will introduce additional market volatility in 2019
  • political issues in Europe will persist for a while, but in the end they have to be resolved in the best interest of all parties

Finally, Marko beautifully summarizes populism in its current incarnation which, as we never tire of reminding readers, is a kind of caricature of historical analogs, an amusing state of affairs considering that populism is itself inherently farcical to the extent the plot can almost never be taken seriously. Here’s Kolanovic:

Negotiations and frictions are part of populist theatrics and will be used by politicians for self-promotion, often bringing everyone to the edge. Yet we believe that these new age populists do not have broad enough support or conviction to cause the type of disasters that we witnessed in the 20th century.

Here’s hoping, Marko – here’s hoping.


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15 comments on “Marko Kolanovic Delivers 2019 Outlook And It Is Quite Something…

  1. I think someone twisted his arm to press the bullish case…and 2 he’s talking about zh, as they went political about 3 yrs ago and are majority inflammatory political stories.

    • monkfelonious

      AVW, c’mon man, ZH has been political for far longer than three years! I got banned TWICE for comparing ZH to ‘What Really Happened’ and that was far away longer than three years ago. I mean they run the same stories. They both are nothing but a portal for losers that can’t even play video games for lack of attention span. I believe the originator of ZH every once and awhile writes something about bonds (with few commenters) otherwise it’s all designed to feed whack-jobs and ghouls their daily offal.

  2. kenneth Shaw

    How does that square iwith Nomura’s take on “Risk Parity model having added enormous notational size in Global Govt bonds over the past month, against a very large selling of global equities & credit”.

    Does not bode well for Marko.

  3. “I can’t go short if you don’t go long!”, said the balrog to Gandalf.

  4. Weird market moves, populism. Same roots: misinformation.
    Issue not easy to solve in a democracy. Who decides what is misinformation or quality info?
    I perfectly understand what Marko says, it’s in front of me every day in forums, blogs, twitter. Should we ban Twitter, close the blogs? Really, not easy. Eternal problem of democracy. We have to let even idiots speak.

  5. That‘s true, Franceska, we habe to let the idiots speak. But how do we keep them from dominating the discourse?
    That is a problem many western developed countries will have to find an answer to – and better fast.

  6. add.:
    banning Twitter would probably only make things worse – lots of self-styled martyrs of free speech to be expected

  7. I wouldn’t worry about a few loud mouthed pols – wait until the next global recession. Marko might have to brush-up on proletariat revolutions.

  8. In the interim, if you spooz you lose.

  9. So now that the market is going down when Marko has been repeatedly banging on the bullish drum, well, it must be because of fake news’ influences on the market?! Come on. Those news sources have been around forever and they didn’t seem to be a problem to Marko until now.

  10. Lots of comments on this one…..Marko is like the rest of us, aiming at a moving target as the rules change simultaneously. It is easy to loose your focus momentarily!! He presumes at times that a strong economy exists ,yet it can’t seem to tolerate even 3% short term rates. Stealth inflation and corporate Shenanigans (product downsizing and sneaky price increases) have increased wealth disparities in the the consumer class so keeping the distorted market s going gets to get more complicated in the future.

    Am more likely to buy into Nomura’s (Charlie) views at this point in time..

    George

  11. “Though markets are generally rational, they occasionally do crazy things. Seizing the opportunities then offered does not require
    great intelligence, a degree in economics or a familiarity with Wall Street jargon, such as alpha and beta. What investors then need instead, is an ability to both disregard mob fears or enthusiasms and to focus on a few simple fundamentals. A willingness to look unimaginative for a sustained period – or even to look foolish – is also essential.” – WB

  12. Harvey Cotton

    Well, he predicted 3,000 for year-end 2018, so who knows?
    Maybe soon we will get a trader’s take on how to unify gravity with the other three fundamental forces…

  13. Marko’s interesting take on year end 2019 S&P at 3000 is plausible. US, China, EU, Japan, EM will work hard on delaying a recession for the obvious reasons, which means governments will work on finding real or ‘fake’ agreements while CB will work on a delicate interest rate dance based on a longer run-way (say 16-18 months from now) If that were to be the case, interest rates will rise not too little and not too much for 18 months (+/-) at which time they will reach their peak and begin to be clawed back. If Marko is correct and we see 3000 in Dec. 2019, we will begin to see the signs of a recession in mid to late 2020. Until then plenty of time to be in the market which will remain highly volatile, with broad swings in both directions and provide both value, growth and everything in between. Reason would have us remain cautious, on the sidelines with large cash positions or in more secure investments. How is it that the market hardly ever rewards reason?

  14. trapaholic

    Marko used to cause a spike on his bullish headlines after being correctly bearish last time around. Trouble is, he is at JPM and they almost always try to calm the markets during a crash — like in 29…

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